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Heading in the right direction? A consultation on the transfer of contracted-out benefits

The Department for Work and Pensions (DWP) has responded to an ‘urgent demand by the industry’, publishing a consultation on the proposal to allow the transfer of the contracted-out benefits of pensioner members to schemes that have never been contracted-out.

BackgroundIn April 2016, contracting-out on a salary related (COSR) basis was abolished, leaving only limited circumstances in which COSR benefits may be transferred to schemes which have never been. This means that while the contracted-out benefits of deferred members may be transferred – with their consent – to a scheme which has never been contracted-out, the benefits of pensioners cannot be so transferred. Bulk transfers of contracted-out benefits without member consent cannot be made to schemes which have never been contracted-out. With the consultation, the DWP acknowledges that the industry wants legislation to be introduced which would permit such bulk transfers to be made.

The proposalThe consultation proposes to introduce legislation [1] that would enable the COSR benefits of pensioners to be transferred with their consent, to a scheme that has never been contracted out.

However, the circumstances of such a transfer would be limited and under the DWP proposal, this type of transfer could only take place where:

the transferring scheme is in a Pension Protection Fund assessment period; or

the transferring scheme has entered into a regulated apportionment arrangement: these are used infrequently.

Transfers to overseas schemes would be excluded.

In addition, for the transfer to go ahead, the pensioner would need to:

give their consent in writing;

acknowledge to the transferring scheme – again, in writing – that the benefits provided by the receiving scheme may be in a different form and amount to those which would have been payable by the transferring scheme, and that there is no statutory requirement on the receiving scheme to provide a survivor’s pension.

Obtaining the consent of all relevant pensioner members, or even being able to locate them all to request their consent, could prove difficult.

ConclusionDespite highlighting that the circumstances in which a transfer could take place are limited, the pensions industry has welcomed this step towards more flexibility in the transfer of COSR benefits.

The DWP consultation ended on 23 April 2017 and can be viewed here. The DWP has said that the issue of making bulk transfers of COSR benefits without consent to schemes which have never been contracted-out will be considered later this year.